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Market equilibrium and welfare effects of a fuel tax in China: The impact of consumers' response through driving patterns

Jijun Tan, Junji Xiao () and Xiaolan Zhou

Journal of Environmental Economics and Management, 2019, vol. 93, issue C, 20-43

Abstract: We investigate the market equilibrium and welfare effects of a fuel tax in China relative to an alternative policy instrument that rations the number of new automobile sales through auctioned quotas. Unlike those of previous studies, our modeling approach incorporates both household car purchase and utilization decisions, the latter of which have been ignored in previous studies on China's fuel tax. Ignoring this margin of choice will underestimate the fuel tax's ability to mitigate externalities. Using detailed household-level panel data and a fixed effects econometric specification, we estimate the fuel price elasticity of vehicle miles traveled is −0.59 on average. The results of the counterfactual analysis suggest that a 51% increase in tax-inclusive gasoline prices will reduce car sales by 24.9% but increase social welfare to a degree that depends on vehicles' lifetime. We find that compared to auctioned quotas, the fuel tax results in greater car sales but higher social welfare.

Keywords: Fuel tax; China automobile market; Welfare analysis (search for similar items in EconPapers)
JEL-codes: Q51 Q58 H23 (search for similar items in EconPapers)
Date: 2019
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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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